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AstraZeneca plc: Buy the Dip?

The Mystic trial failure isn't the end of AstraZeneca's oncology driven come back.

AstraZeneca plc(NYSE:AZN) stock tumbled after the company announced the failure of an important clinical trial recently. Although the shares have recovered somewhat, the stock is still off by about 11%, and investors are right to wonder if now is a good time to buy.

Now that it's clear Imfinzi won't become a treatment option for newly diagnosed lung cancer patients, AstraZeneca probably won't hit the ambitious revenue target the company reiterated earlier this year. Luckily for investors, other facets of the company's comeback strategy continue to sparkle. Now that the future is a bit less hazy, let's take a look forward to see if the market has pounded this big pharma stock down into value territory.

Deciding whether or not to buy a stock dip can be terribly frustrating. Image source: Getty Images.

The bad news

Loss of patent-protected exclusivity for two of AstraZeneca's biggest revenue streams, Crestor and Symbicort, are taking a toll. Sales of both have fallen by double-digit percentages this year, which dragged total product sales 11% lower in the first half of 2017 than figures recorded during the first half of 2016. For several years now, the company has soothed shareholders' anxiety by pointing to an impressive stable of new cancer drugs, and for good reasons.

Global cancer drug spending is expected to rise from about $107 billion in 2015 to roughly $150 billion in 2020, largely driven by expensive new therapies like AstraZeneca's recently approved Imfinzi. This is the fifth drug of the PD-1 blocking class, which makes it harder for some cancer cells to switch off an immune system attack. This May, the FDA gave Imfinzi a thumbs up for the treatment of advanced bladder cancer patients that relapse after standard chemotherapy, but this is a somewhat limited patient population.

AstraZeneca's ambitious goal to raise revenue from about $22.3 billion over the past year to more than $40 billion by 2023 was fairly dependent on Imfinzi succeeding as a treatment for the much larger population of untreated lung cancer patients. This is why the market beat the stock down after the therapy failed to provide a significant survival benefit for this group on its own, or in combination with another experimental drug in the company's pipeline.

Light at the bottom of the patent cliff

Following the recent market beat-down, AstraZeneca shares have been trading at about 16.3 times this year's earnings expectations. That's significantly cheaper than the average stock in the benchmark S&P 500, which currently trades at around 18.9 times 2017 earnings estimates. This makes AstraZeneca shares seem like a relative bargain if the company can return to growth soon. Although Imfinzi might not be the star immunotherapy Astra had hoped for, I think the company's oncology lineup has enough power to reverse the direction of its top line within the next few years.

The FDA recently accepted an application for a potential new treatment for a difficult-to-treat form of lymphoma. Acalabrutinib works in a similar manner to the extremely successful leukemia therapy, Imbruvica, a multibillion-dollar per year blockbuster that launched in 2013. The Agency found acalabrutinib's clinical trial results compelling enough to grant the therapy a priority review that should wrap up in the first quarter of 2018. If ongoing attempts to expand its availability to more common blood cancers are successful, the company thinks it could generate more than $5 billion in annual sales at its peak.

Image source: Getty Images.

AstraZeneca's top-selling cancer therapy at the moment, Tagrisso, is also poised to drive growth in the years ahead. Second-quarter sales of the drug surged 36% higher than the previous quarter to an annualized run rate of $928 million. Recently announced results showing the drug provided a significant survival benefit over standard treatment for a genetically defined group of previously untreated lung cancer patients could help this drug eventually surpass $3 billion in annual sales at its peak.

Although Imfinzi might not have been able to outperform standard chemotherapy for previously untreated lung cancer patients in advanced stages, it could become an important option for oncologists trying to keep the disease at bay for patients with inoperable tumors following the standard first line of treatment. The FDA recently granted a breakthrough designation to the drug based on its ability to provide a benefit in this setting observed during an interim analysis of the ongoing Pacific trial.

If final results from Pacific trial fall in line with interim observations, an application to expand Imfinzi to this large population would receive a speedy review. While Imfinzi probably won't reach the $6.5 billion annual sales target AstraZeneca set a few years ago, success in this setting would go a long way toward helping the company return to growth. The turnaround might not occur fast enough to allow the company to maintain its current dividend, but it looks like now might be a good time for long-term investors to consider this beaten-down pharma stock.

Cory Renauer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.